Ethics Matters: How Fannie, Freddie won congressional support

Editor's note: This article is the first in a four-part series to be published in November and December on Fannie Mae and Freddie Mac's financial crisis.

Fannie Mae and Freddie Mac are the common names for the Federal Mortgage Association and the Federal Home Loan Corp., respectively. Both are federal government-sponsored companies. While neither company makes loans, they each buy mortgages from banks and savings and loans institutions to enable those lenders to serve low-income homebuyers. Fannie and Freddie hold some of the mortgages they buy, and others they bundle and sell to investors as securities.

For years, Fannie and Freddie bought risky subprime and alternative documentation, or Alt-A, loans. The companies spent billions buying high-risk loans and guaranteeing repayment of loans sold as securities.

Political influence

In these efforts, Fannie and Freddie cultivated friendships with important members of Congress, such as Sens. Christopher Dodd, D-Conn., chairman of the powerful banking committee; Robert Bennett, R-Utah; and Reps. Barney Frank, D-Mass.; and Maxine Waters, D-Calif. They convinced them, and many others in Congress, that the companies' success and homeownership for low-income buyers were inseparable.

In the 2008 election cycle, Fannie and Freddie found the money to donate to their favorite politicians, even with the companies' troubled finances. Fannie gave $726,650 to federal candidates, 55 percent of it going to Democrats. Freddie gave $220,497 and split the money equally between Democratic and Republican candidates.

In 2006, Freddie's political contributions got the company in trouble with the Federal Election Commission. Freddie paid a fine of $3.8 million - the largest civil fine ever paid to the commission - to settle charges that Freddie used corporate resources to raise $1.7 million for politicians.

By publicly supporting Fannie and Freddie, politicians impressed voters with their support for expanding homeownership to low-income homebuyers. The companies always shared credit with politicians for investments in their communities.

The companies sponsored high-profile political events, parties, conventions and golf outings, especially those honoring members of Congress. For example, Fannie was one of six sponsors of the golf charity event "First Tee" that honored former House Whip James E. Clyburn, D-S.C., and Sen. Saxby Chambliss, R-Ga.

Rep. James Leach, R-Iowa, once remarked about Fannie and Freddie, "They have always done everything in their power to massage Congress."

Fannie and Freddie also lobbied Congress and federal agencies. According to lobbying records during a 10-year period, Fannie spent $79.5 million and Freddie $94.8 million to that end.

Political intimidation

When necessary, Fannie and Freddie intimidated members of Congress. In 2003, Richard H. Baker, R-La., served as chairman of the House Financial Services Subcommittee, which had oversight of Fannie and Freddie. Baker received information from the Office of Federal Housing Enterprise Oversight on the companies' executive salaries. A Fannie spokesperson told Baker that Fannie would sue him if he publicly released the salary information. Fearing a costly lawsuit, Baker withheld the information. After retiring from public office, Baker remarked that in his 21 years in office, he never saw any private entities with the arrogance and political of Fannie and Freddie.

Former Fannie CEO Franklin Raines boasted in a 1999 investors meeting, "We manage our political risks with the same intensity that we manage our credit and interest rate risks." In fact, both Fannie and Freddie managed their political risks much better than their financial risks.

Political influence, however, came at a high price. Fannie's and Freddie's friends in Congress constantly demanded the companies buy more and more of the risky loans of low-income borrowers. Years of reckless business practices brought the companies to the brink of financial ruin by 2008.

John D. Copeland, J.D., LL.M., Ed.D., is an executive in residence at The Soderquist Center for Leadership and Ethics and professor of business at John Brown University in Arkansas.

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